Airlines may get some succour from govt in form of flying credits, Bloomberg, 12/3/15

New Delhi: For Indian airlines such as Jet Airways India Ltd and SpiceJet Ltd that are struggling with $10 billion of losses, Prime Minister Narendra Modi may be offering some succour.
The government is considering easing rules that force local airlines to serve the nation’s remote locations despite little demand. Under proposed changes, smaller private operators plying these routes would be given credits, which larger carriers would be able to buy to meet the capacity regulations, without having to actually fly to those destinations.
“Bigger airlines lose a lot of money flying in those areas where passenger loads aren’t very high,” G. Ashok Kumar, a joint secretary in the ministry of civil aviation, said in an interview in Bengaluru. The system of credits would free up larger planes, while giving smaller carriers incentives to head to far-flung places, he said.
Loosening the 20-year-old rule might provide some respite to the airlines as it would let them cut consumption of jet fuel, which accounts for about 50% of their costs. State taxes as high as 30% make jet fuel in India the costliest in Asia, causing defaults by some carriers on payments to banks, vendors, airports and staff.
Competition driving base fares to as low as 2 US cents, combined with high fuel costs, have led to more than $10 billion in aviation losses in India over the past seven years. Indian airlines are estimated to have lost $22 every time a passenger stepped on board during that period, according to Capa Centre for Aviation.
Liquor baron Vijay Mallya’s Kingfisher Airlines Ltd stopped flying in 2012 after payment defaults.
“Forcing loss-making airlines to fly large, 180-seater aircraft to remote locations with barely 10% to 30% occupancy is unfair and illogical,” said Amber Dubey, New Delhi-based head of aerospace and defence at KPMG in India. “It leads to an avoidable loss of imported fuel and losses for the troubled airline sector.”
IndiGo, India’s biggest airline by market share, Jet Airways, SpiceJet and AirAsia India Ltd didn’t reply to requests for comments on the potential policy change. Vistara, Singapore Airlines Ltd’s local joint venture, declined to comment.
Bailed out
Jet Airways posted losses in all but the last two of the eight quarters through December 2014. SpiceJet, which was bailed out by a group of investors after facing financial difficulties last year, hasn’t made a quarterly profit since 2013. Closely-held IndiGo is the only Indian airline that makes money.
Jet Airways has surged 78% in the past 12 months as Brent crude prices slumped almost 50%, compared with the 31% advance in the benchmark S&P BSE Sensex. SpiceJet has advanced 51%, buoyed by the bailout.
Under the current rules, Indian carriers have to deploy 10% of their capacity on links to places such as Lakshadweep, an archipelago in the Arabian Sea with just 64,429 people.
Aside from Lakshadweep off the west coast, airlines also have to connect to far-off locations such as Assam in the northeast, Jammu and Kashmir and the Andaman and Nicobar Islands in the Bay of Bengal, according to the government.
Kumar at the New Delhi-based Ministry of Civil Aviation didn’t give a time line for introducing the credits system or estimates of their potential value.
Small airports
Modi’s government won a landslide victory in May last year partly on a pledge to improve transport links, including to more remote areas of the world’s seventh-largest country by land area.
India had identified 35 non-metro airports initially, and a further 28 smaller airports subsequently, for development, junior aviation minister Mahesh Sharma told lawmakers on 3 March. The government has already developed 49 of those, Sharma said.
Further steps such as the flying credits are probably needed to achieve that goal, said Mark D. Martin, founder of Dubai-based Martin Consulting Llc, which advises airlines on strategy.
“The government must innovate more such incentives to encourage anyone who owns an aircraft—from the size of a three-seater Cessna right up to a light turbo-prop—to connect interior regions of India,” he said.
Elevated duties
Flying credits may spur growth for private jet operators if the government gets the regulations right, said Bhupesh Joshi, chief executive officer of New Delhi-based Club One Air, which has a fleet of nine planes.
Revenue from fares, credits for private jets, and state aid will have to make up for India’s high aviation costs—especially jet fuel—for the policy to work, he said.
Private jet operators face elevated customs duties, lagging airport infrastructure and mandatory training costs as high as for commercial airlines. That contributed to a decline in the number of such aircraft to 552 in 2013 from 558 a year earlier, according to a presentation by Business Aircraft Operators’ Association, an industry group.
“We are definitely very happy that this is happening,” Club One Air’s Joshi said. “But support from regulators and the governing framework will have to be there.”